Thursday, July 29, 2010

NABUCCO V. South Stream

If the secret to energy security is diversity of sources, then GAZPROM appears to be busy guaranteeing security of natural gas deliveries to Europe. In the past decade, they have built or initiated a number of gas pipeline projects: Blue Stream under the Black Sea to Turkey, North Stream under the Baltic Sea to Germany, South Stream under the Black Sea to the Balkans and the rest of Europe. The problem, of course, is that these pipelines represent a false sense of security. They do not promise diversity of supply, since all the pipelines are under the control of GAZPROM, an independent corporation that is owned by the Russian State.
These new pipelines actually will give Moscow the freedom to punish some states without affecting gas deliveries to others. In January 2009, Moscow cut fuel supplies to Ukraine only to be surprised by protests from Western European countries who were dependent on the same pipeline for fuel deliveries. With the new pipeline network, Moscow will be able to cut supplies to the "Near Abroad" and continue to deliver gas to its European neighbors. This could force countries of the former Soviet Union back into the Russian orbit.
With the exception of limited deliveries through the Baku-Tblisi-Erzerum pipeline, all gas from the Caspian basin reaches the world market through the GAZPROM pipeline network. To break this monopoly and give the countries of the Causcasus and Central Asia an independent alternative, the European Union has endorsed the creation of the NABUCCO pipeline. NABUCCO is designed to carry gas from the Caspian, through the Baltics, and into Western Europe. When completed, NABUCCO will be able to carry about 31 bcm of gas per year, twice the 2009 production of Azerbaijan. South Stream is designed to carry 63 bcm, more than four times Azerbaijan's production. In short, even when Caspian offshore fields come on line, there will not enough natural gas in the area to fill easily both pipelines.
GAZPROM is doing what it can to make sure that NABUCCO is never built, and that Russia will keep its hand on the spigot for natural gas supplies to Europe. NABUCCO has six partners, including the German utility company RWE and Bulgarian energy holding. GAZPROM recently approached RWE to discuss their potential involvement in South Stream, and a German newspaper reports that RWE is considering the offer (The Moscow Times, 13 July 2010). Similarly, Bulgaria has signed a "road map" to accelerate the construction of South Stream, in return for cheaper prices for its own gas deliveries from Moscow (The Moscow Times, 07 July 2010; Hurriyet Daily News 18 July 2010). Bulgaria had little choice in the matter, as it is almost totally reliant on Russia for its supply of natural gas. Russia reportedly also threatened to run its pipeline through neighboring Romania instead--denying Bulgaria of any transit fees. Bulgaria claims to be committed to both South Stream and NABUCCO, but the limited supply of upstream gas makes such equivocation problematic.
An independent delivery option for Western Europe would mean approximately 10% of its natural gas supply could come from the Caspian without Russian interference. This reduces Russia's ability to limit the freedom of action of America's European allies. In addition, if Europe burns natural gas from Central Asia, it would free North African gas to be converted to LNG and shipped to the United States.
For NABUCCO to succeed, new sources of natural gas will have to be found to fill the pipeline.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at